Bridging the Solar Divide: Demand Responses to Subsidies \\ among Low-Income Households

• In Event: Solar Policy — Investment, Diffusion, and Local Governance

Abstract

Governments increasingly rely on subsidies to encourage household adoption of clean energy technologies, yet credible estimates of demand elasticities, especially for low-income households, remain limited. Precise empirical estimates of the take-up of and associated price elasticities are needed to better inform the construction and effectiveness of such subsidies. An inelastic estimate suggest that small subsidies may be ineffective in increasing demand, and increasing the amount of the subsidy will lead to a less than proportional increase in demand, however, elastic estimates suggest the opposite-- governments need not adopt policies that offer extremely large subsidies as even a small incentive leads to a big response by consumers. The impact of such subsidies targeted to lower-income areas or households is a crucial policy consideration as the tariff-structure of electricity credits generated by solar PV technology tends to incentivize increased adoption by wealthy and energy guzzling households and dis-incentivizes adoption by below-median consumption households. However, coupled with increasing energy costs for lower-income consumers, subsidies specifically for such consumers may lead to important equity benefits.
This paper studies the price effects and demand responses to solar subsidies in California, exploiting the removal of a general market solar subsidy policy and its replacement by a subsidy that targeted low-income households in disadvantaged areas, determined as census tracts that lay above the 75th percentile of an environmental score. This environmental score forms a part of California's larger 'Environmental Justice' program, and gives us quasi-random variation for a causal estimate. 
Using project-level data on installations, we first quantitaively estimate the causal effect of subsidy eligibility on prices and then use this variation as an instrument to recover the demand elasticity. We find that following the policy change, low-income households in disadvantaged tracts experienced a 33.4\% (or a \$8,500) reduction in out-of-pocket solar installation prices, relative to non-disadvantaged tracts. Using this price variation, we estimate a demand elasticity of -0.59, indicating relatively inelastic demand. We then apply the Marginal Value of Public Funds (MVPF) framework to evaluate the welfare implications of targeted solar subsidies. Accounting for environmental benefits, fiscal externalities, and utility revenue effects, we estimate an MVPF of 1.13, implying that each dollar of public spending generates more than one dollar in social benefits.

Authors

• Kavya Ravindranath, George Washington University
  Non-Presenting Co-Author

• Rui Zhong, Texas A&M University
  Presenting Author